India's industrial output shrank by a surprise 0.4% in September and the country's trade deficit hit a record high, data showed Monday, underscoring the government's challenge in spurring growth.

The September industrial production figures for Asia's third-largest economy were sharply below market expectations of a 2.8% year-on-year rise and a blow to the government which hopes a recent reform drive will boost the economy.

"The figures are testament to the external and structural headwinds India's economy is still facing," HSBC India chief economist Leif Eskesen said.

India's production at factories, mines and utilities was in sharp contrast to industrial output in neighboring China that grew by 9.6% in October amid signs of tentative recovery in Asia after recent weakness.

The Indian industrial data coincided with the trade deficit climbing to a record $20.96 billion, sending the country's currency down to its weakest level in two months of 55.11 rupees to the dollar. Shares also turned negative.

October's exports fell by 1.63% from a year earlier to $23.24 billion, hit by weak European and U.S. markets, while imports rose by 7.4% as India's huge reliance on imported oil to feed its economy pushed up purchases.

On the industrial scorecard, manufacturing output slipped by 1.5% while capital goods -- such as factory plant equipment -- plunged by 12.2%, highlighting weak investment and business confidence.

The figures come as India has been struggling to avoid a downgrade by ratings agencies of its sovereign debt to junk status.

"Overall economic momentum is muted," said Jyoti Narasimhan, economist at IHS Global Insight.